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Asymmetric Information and the Market Structure of the Banking Industry

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  • Giovanni Dell'Ariccia

Abstract

The paper analyzes the effects of informational asymmetries on the market structure of the banking industry in a multi-period model of spatial competition. All lenders face uncertainty with regard to borrowers’ creditworthiness, but, in the process of lending, incumbent banks gather proprietary information about their clients, acquiring an advantage over potential entrants. These informational asymmetries are an important determinant of the industry structure and may represent a barrier to entry for new banks. The paper shows that, in contrast with traditional models of horizontal differentiation, the steady-state equilibrium is characterized by a finite number of banks even in the absence of fixed costs.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 98/92.

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Length: 31
Date of creation: 01 Jun 1998
Date of revision:
Handle: RePEc:imf:imfwpa:98/92

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Cited by:
  1. Degryse, H.A. & Ongena, S., 2006. "The Impact of Competition on Bank Orientation," Discussion Paper 2006-68, Tilburg University, Center for Economic Research.
  2. Erkki Koskela & Rune Stenbacka, 2000. "Agency Cost of Debt and Lending Market Competition: Is there a Relationship?," CESifo Working Paper Series 274, CESifo Group Munich.
  3. Claudia M. Buch, 2001. "Distance and International Banking," Kiel Working Papers 1043, Kiel Institute for the World Economy.
  4. Erkki Koskela & Rune Stenbacka, 2000. "Bank mergers and the fragility of loan markets," Finnish Economic Papers, Finnish Economic Association, vol. 13(1), pages 3-18, Spring.
  5. Haukioja, Teemu & Hahl, Jarmo, 2001. "The Emergence of the New Economy, and its Challenge to Financial Intermediation and Banking," Discussion Papers 772, The Research Institute of the Finnish Economy.
  6. Hyytinen, Ari, 2001. "Information Production, Banking Competition and the Market Structure of the Banking Industry," Discussion Papers 749, The Research Institute of the Finnish Economy.
  7. Dell'Ariccia, Giovanni, 2001. "Asymmetric information and the structure of the banking industry," European Economic Review, Elsevier, vol. 45(10), pages 1957-1980, December.
  8. Gual, Jordi, 1999. "Deregulation, integration and market structure in European banking," IESE Research Papers D/397, IESE Business School.

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